4.12.2 - Commercial Banks and Investment Banks Flashcards
What is a retail bank?
A financial institution which attempts to make its money by selling banking services to customers.
Who are the customers of commercial banks?
The general public.
How do commercial banks make themselves attractive to customers?
- Opening branches on high streets
- Good online banking
- Good saving interest rates
What is an investment bank?
A bank that generally does not accept deposits from the general public.
Tends to involve advisory work, floating private companies on the stock market or deal in financial markets for their own account.
What is systemic risk?
The risk of a breakdown of the entire financial system, caused by inter-linkages within the financial system, rather than simply the failure of an individual bank or financial institution within the system.
How has the government tried to mitigate systemic risks in the UK?
Separate the ‘high-street’ and investment activites of banks to reduce inter-linkages in the system.
How have the ‘high-street’ and investment activites of banks been de-linked?
Ring fenced the investment activities from the commercial activities.
Done by internal firewalls (Chinese walls).
What is the main form of money?
Bank deposits.
What is credit?
A bank making a loan.
The loan results in the creation of an advance, which is an asset on the bank’s balance sheet, and a deposit, which is a liability of the bank.
How are bank deposits created?
Essentially, a promisory IOU is given from a bank to another party. As long as people think that the bank will honour their promise, the IOU is essentially money.
How would a ‘monopoly’ banking system work?
A person would deposit £x into a bank, meaning the bank has £x assets, and £x liabilities as the bank is liable to honour any cash withdrawals from the customer.
Assuming the bank will loan £0.9x to someone else, the bank now has £1.9x assets and £1.9x liabilities.
What do repayments do to the money supply?
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They reduce the money supply in the economy.
What do loans do to the money supply?
They increase the money supply in the economy.
How has it become more difficult for banks to lend money?
Since ‘08, central banks have imposed larger minimum capital ratios on the banks.
Why are capital ratios imposed?
There is a reduced likelihood of banks becoming insolvent if there is a fall in the value of their assets (i.e. if someone does not pay back their loan).
